Instantor's Blog

New Tech Prevents Excessive Debt Incursion

At Instantor we want to contribute to a more inclusive and fair financing market. We do this by making people's financial lives easier and helping organisations to understand their customers’ true financial capacity, using transactional data.

Our client, Lendify – Sweden’s largest marketplace for loans – wrote a great opinion article on how traditional credit assessments need to be updated. How new technology, like our AI credit predictor – Insight – can provide a more accurate and detailed risk analysis for lending organisations and be a force for a healthier lending market. Please enjoy a translated version by us that was originally published in Swedish by Realtid.se in October 2018.

In an increasingly digitalised society where everything is fast-moving, banks need to keep their credit scoring process up-to-date. Today, banks’ credit scores are to a great extent based on information from credit bureaus, which are important for risk assessment – but not all data is captured and the data has a backlog of 30 days. That’s simply not good enough anymore!

Image: Leio McClaren

The consumer credit market requires streamlining. The terms for borrowers need to improve and the risk for excessive debt incursion needs reducing. Banks have been using inefficient IT systems for too long. The associated high operational costs and large margins have earned the disfavor of the borrowers.

The loan portfolio for unsecured loans amounts to 224 billion SEK today. Retail banks are responsible for about 60 per cent of the loan stock and the niche banks for a majority of the remaining shares. If the average interest rate for consumer credit decreases by just one percentage point, the Swedish people would reduce their costs by more than two billion SEK.

The gap between those who own assets and those who do not have dramatically increased during the 21st century and today the wealthiest tenth own at least 60 per cent of all assets. The low interest has driven up the price of assets, moreover, the group with the economic upper hand also have access to the lowest-cost capital.

Far from everyone owns assets and are thereby limited to the consumer credit market. To ensure the gap between asset owners and the rest doesn’t expand further, a well functioning market for consumer credits is needed.

For an efficient consumer credit market, the risk for excessive debt incursion needs minimising. The majority of the actors on the market are verifying a borrower’s financial capacity through credit bureaus.

Image: Raw Pixel

According to the Swedish Financial Supervisory Authority’s (FSA) mapping of the consumer credit market – presented the 14th of June 2018 – only 12 percent of niche banks use a so-called “left-to-live-off” (KALP) calculation. This is a calculation that shows how much capital a borrower has got left to live off after all fixed costs are paid.

On top of the fact that all actors should carry out a KALP calculation, new technology is now opening up opportunities for even more thorough screenings of the borrowers’ financial situations – technology and tools that banks aren’t utilising today.

These new technologies make it possible for credit lenders to, through a digital bank statement, gain knowledge of data that is essential to carry out an informed credit risk assessment.

Through digital bank statements, the credit lender acquires real-time information about potential payday loans that haven’t yet been reported to the credit bureau,payments to gambling companiesor debt collection payments that haven’t yet led to a record of a non-payment.

In a digital, fast moving, society it’s no longer sustainable to make credit ratings based on bank statements with a historic backlog of 30 days and where important information isn’t captured.

The reasonable settlement is for FSA to place demands on the actors of the financing market to always carry out a thorough KALP and to always review a digital bank statement in credit scoring processes. In a digital world, it’s crucial for actors within the government and financing market to stay up to speed with technological developments.